Eleventh District economic activity continued to decline in late November and December, but contacts were generally more upbeat about the outlook than six weeks ago. Many contacts remain cautious about the outlook and do not expect much improvement until the second quarter at the earliest. Manufacturing activity was flat or slightly down. Business service firms say activity suggests the economy is faltering, and the airline industry continues to suffer from weak demand and soaring security costs. A burst of sales around Christmas helped many retailers meet their expectations for the season, although discounting was very heavy. Contacts at financial institutions say loan demand remains flat, and there have been no reported changes to delinquency rates. Construction and real estate activity continued to weaken, and the energy industry continued to decline. There was little change in agricultural conditions.

Prices and Labor Markets
Price reports were mostly unchanged or lower. Warm weather and flagging demand led to declines in natural gas, refined product and crude oil prices in late November and early December. Forecasts of colder weather and collaboration between OPEC and non-OPEC oil producers to restrict crude oil production led prices to bounce back just below mid-November levels. Inventories of distillates, heating oil and diesel are twenty million barrels higher than last year. Natural gas inventories built to 3.1 trillion cubic feet in storage due to warm November weather. With 45 percent of the heating season behind us, contacts expect to end the winter with a substantial overhang of natural gas in storage.

Most manufacturers reported stable or declining prices, and nearly all contacts said inventories were in line with expectations. Retailers said price cuts were higher than planned and deeper than last year. While contacts in many industries noted the benefits of lower energy costs, most said selling prices were falling more than costs. Rising medical, property and liability insurance costs remain a serious concern.

Labor markets continue to loosen. Contacts in all industries report that it is easier to obtain quality workers and wage pressures have eased. There were fewer reports of future layoffs expected, but there were no reports of hiring and some contacts said they were not replacing workers when they leave.

Manufacturing
Manufacturing activity was flat to slightly down in late November and December. Demand continued to wane for construction-related products, such as fabricated metals, primary metals, cement and brick. Producers of fabricated metals are concerned because they are working off backlogs but have not seen an uptick in new orders. Contacts supplying commercial building are particularly worried about the outlook. The primary metals industry continued to contract. Cement activity also declined, although this was partly due to weather delays. Contacts say most demand is coming from public works projects, and demand for private projects continues to falter. Brick sales fell slightly, and inventories are a little high. Lumber producers reported some seasonal slowing, but said that low mortgage rates were stimulating demand. Paper producers reported little change in activity with sales seasonally slower. Glass sales were also seasonally slower, and producers have cut production to keep inventories in line.

Demand for some high-tech products improved slightly since the last survey. Consumer demand for computers and related equipment remained good while demand from businesses was flat to slightly improved. Demand for telecommunications products was still down, however, with one firm reporting sales down 20 percent from this time last year. Most high tech contacts remain cautious, expecting little or no improvement in demand until the second quarter, at the earliest.

Energy-related manufacturers continued to report difficult conditions. Refiners have seen margins fall steadily throughout the last two months--to the lowest levels in two years--as gasoline and heating oil prices weakened steadily. Still, Texas and Louisiana refineries continued to operate at high levels. Demand for plastics and petrochemicals remained weak and a serious capacity glut in some products led to price declines for polyethylene, polystyrene, and polyvinyl chloride.

Services
Business service contacts say activity levels suggest the economy is faltering. Bankruptcy and litigation activity remains strong, while other activity is "dead in the water." Real estate activity is "okay" but has slowed. Demand for temporary services has been flat; demand is coming from the service sector, including retail, and some manufacturing. One service firm noted that their customers have projects and the money to execute them, but have decided to put them on hold until April.

The airline industry continues to struggle with weak demand and soaring security-related costs. The industry has significantly reduced capacity, with 15 percent fewer aircraft in service compared to a year ago. Industry capacity is roughly at 1997-98 levels. Price cuts stimulated strong leisure demand over the holidays, but business demand and international traffic remains weak. Revenues are 15-20 percent below last year's levels.

Retail Sales
Retail sales were weak in late-November and December but activity picked up right before and after Christmas, leaving most retailers near their expected level of sales. Sales were weakest at department stores and high-end retailers. "Tremendous" discounting helped clear inventory, and retailers say inventories are in line with last year. The last minute flurry of sales led to optimism about future sales growth because some "consumers are purchasing goods at a discount, where previously they weren't purchasing at all." However, many stores have reduced their purchases for the first quarter and do not expect sales to pick up much until the second quarter.

Auto dealers reported small declines in the number of cars sold. They believe this is due to the removal of zero percent financing. Contacts expect the first quarter of 2002 to stall because the financing incentives "bought up most of the market." Dealers expect an increase of rebates soon.

Financial Services
Loan demand remains flat overall. However, contacts at medium sized institutions are reporting strong growth for 2001 and good expectations for the coming year. Small business lending is stable, and refinancing activity has been strong. Perceptions that economic recovery later in the year will bring increased interest rates have pushed those on the fence to refinance or borrow money now. Consequently, lenders are optimistic about the coming six months. There were no reported changes to delinquency rates or other indications of a weakness in the bank performance measures.

Construction and Real Estate
Construction and real estate activity continued to weaken over the last six weeks. Office real estate activity has been slow, according to contacts who say they are cautious. Industrial activity is also slow, and some big box space has been vacant for over a year. Space that had been occupied by telecommunications firms is being refitted and re-marketed for other uses. Housing markets remain soft, particularly for higher priced homes. Contacts say cancellations are still widespread, and "it's getting harder and taking longer to get buyers to commit." Weakened job growth has hurt apartment-leasing demand, and concessions and incentives are on the rise. Investment in the multifamily market has weakened.

Energy
The U.S. rig count continues to decline rapidly, falling from over 1000 in early November to 887 at year-end. The decline seems to have been accelerated by warm weather, a build-up in natural gas and heating oil inventories, and uncertainty about OPEC's ability to sustain higher world oil prices. Capital spending in 2002 is expected to be down by about 20 percent. Some rigs have been leaving the Gulf to work international waters. The outlook for domestic service revenues remains unchanged, but the risk has grown that oil-related international work will weaken. The international rig count fell for the second consecutive month.

Agriculture
Harvest and land preparation continued in the plains but remained stalled in other parts of the district because soils were saturated. Supplemental feeding of livestock remained active, although growth of cool season grasses continued to increase and provide additional forage for livestock.